Bank of America Tightens Lending Rules

It may be harder to get a mortgage after Bank of America combines operations with Countrywide Financial Corporation. The bank says one of its first orders of business will be to tighten lending rules.

The merger is expected to close in the third quarter of 2008.

"Putting and keeping Americans in their homes ensures the continued prosperity in the communities we serve," said Bank of America Global Consumer Credit Executive Bruce Hammonds.

In testimony before the Federal Reserve in Chicago, Bank of America unveiled its new mortgage lending guidelines. Following the purchase, the combined mortgage business plans tooffer retail customers the following types of first-lien mortgages:

• Conforming loans underwritten to standard guidelines of government-sponsored enterprises and the government, including FHA and VA loans and other loans designed for low-and moderate-income borrowers.

• Interest-only fixed-rate and adjustable-rate mortgages (ARMs) that are subject to a 10-year minimum interest-only period, which lessens the possibility of short-term payment shock.

• Fixed-period ARMs that provide borrowers low initial rates with the security of fixed payments, subject to protections against steep increases in payment amounts.

One thing Countrywide will not be doing is originating subprime mortgages. Following the purchase, Bank of America said it will make other changes to the loan products offered by the combined mortgage business:

• Discontinue non-traditional mortgages where monthly payments may not cover all interest, or so-called option-ARMs.

• Significantly curtail other non-traditional mortgages, such as certain low documentation loans.

• Implement enhanced borrower protections soon after completion of the Countrywide purchase, including limits on prepayment penalties and protections on non-traditional loans such as interest-only and hybrid ARMs, which limit the risk of future payment shock and provide long-term affordability.

"We think it's important to clearly explain the changes in mortgage lending practices once we operate as a combined company," Hammonds said. "We recognize this tightening, by definition, restricts the availability of credit to some borrowers. However, this will help ensure that those who get loans can afford to repay them.